Coffee giant Tim Hortons needs to fix franchise feud

Tim Hortons is slowly becoming a classic case of a completely dysfunctional franchise system. Franchisees on both sides of the border are now pressuring owner Restaurant Brands International Inc. (RBI) to ease up on its increasingly strict rules around standards, pricing and inspections. Some have even called RBI’s approach abusive.

Some franchisees have now sought a class-action lawsuit against RBI. It seems the trust in this relationship is all but gone. But what lies ahead promises to be even worse. Lack of bilateral trust in a franchise system often leads to more severe challenges down the road.

For most investors, this is hardly surprising. Brazilian-based 3G Capital, which owns the majority of RBI, has a reputation for driving margins higher, whatever it takes. Anything can be compromised or even sacrificed: jobs, costly practices, corporate culture — you name it.

In the case of RBI and Tim Hortons franchisees, two business models are essentially colliding. For decades, Tim Hortons’ steady-as-she-goes attitude which focused on offering a place for people of all ages to congregate, served several communities in the style of the general stores of old. But since 2014, RBI’s rule of law is about efficiency and increased profitability for the parent company.

As for consumers, most would not have noticed the difference. The brown uniforms, the Roll-Up the Rim to Win campaign, summer camp fundraisers — all are still there. What has changed is what consumers never see.

It was a dramatic shift nonetheless. Providing value to RBI shareholders is now superseding the corporate will to empower outlets. This has led to major changes in procurement strategies and corporate protocols. Most franchisees did not sign up for such a modus operandi. Several of them invested hundreds of thousands of dollars, and in some cases, millions.

What was once considered a licence to print money and a solid pension for investors has turned into a nightmare for some franchisees. Failing to anticipate any contractual changes from the franchise often leads to a state of confusion and despair. Most franchises are owned by families or local heroes, who pride themselves in supporting community groups. That is how Tim Hortons gained the recognition it has today.

But it is difficult to argue against RBI’s success. The company is making money and has kept shareholders very happy. Its shares have more than doubled in value since its inception in 2014, now valued at over $80 per share. Most analysts would agree that RBI’s stock has outperformed peer companies by a wide margin in recent years. In 2010, Burger King was going nowhere before it was bought by 3G Capital. That was before RBI. Since then, Burger King is much more competitive and has been able to increase its market share across North America. It would not be surprising to see its most recent acquisition, Popeye’s, experience the same success.

Keep in mind that not all franchisees are suing RBI. Most Canadian and American franchisees are staying on the sidelines and letting things play out. Despite the public discontent around the ownership, some franchisees are co-operating with the new sheriff in town. No lawsuits from Burger King or Popeye’s franchisees, at least not yet.

Over the short term, the acrimony between 3G Capital and franchisees will probably continue. What is at stake is a brand which has served communities well for many years. Tim Hortons went from being an iconic Canadian-owned business to being merely part of a much larger portfolio. This is a reality all franchisees need to accept. Along the way though, RBI will need to appreciate the intimate connection local stores have with communities. There is nothing wrong in making a profit, but RBI will need to work on those relationships before they get worse. A franchise system relies on two fundamental principles: transparency and trust. A lack of both leaves one of the two parties feeling betrayed.

No matter how high RBI’s share price point goal is, it can’t achieve it without the support of its community investors.

Sylvain Charlebois is professor in food distribution and policy, and dean of the faculty of management at Dalhousie University.

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